Swiss financial giant UBS expects the peso to fall to 51 a dollar in 2017 and 55 a dollar in 2018 amid the policy tightening in the US which is expected to boost the greenback.
“We look for USD/PHP at 51 in 2017 and 55 in 2018,” UBS said in a research note. The peso closed at 49.81 a dollar Tuesday.
UBS said it also expected gross domestic product growth in the Philippines to slow down to 5.6 percent next year, after accelerating in 2016.
“So far 2016 has seen extremely strong domestic demand and, in particular, booming investment growth delivered better than expected real GDP growth. The drivers of this boom were likely election related spending [including a large fiscal impulse] and loose monetary conditions that fueled credit growth,” UBS said.
“We expect both of these to reverse in 2017 as deficit projections show a smaller fiscal impulse, and global monetary conditions tighten. We forecast real GDP growth of 5.6 percent and 6 percent year-on-year in 2017 and 2018, respectively,” it said.
UBS said the current account in the Philippines deteriorated sharply over the past four quarters, as growth accelerated.
Bangko Sentral reduced last week the current account surplus target this year to $2.5 billion from the previous assumption of $5.8 billion.
“We anticipate a recovery in the current account balance from this low – looking for a small surplus of 0.3 percent of GDP in 2017 as weaker domestic demand curbs import growth, but expect acceleration in growth in 2018 and rising oil prices to induce a deficit of 1.3 percent of GDP in 2018,” UBS said.
UBS also said inflation might accelerate next year from a generally benign trend in 2016. Bangko Sentral ng Pilipinas targeted inflation this year to settle at 2 percent to 4 percent.
“This is likely to change in 2017 as UBS expects oil prices to rebound to average $60 a barrel in 2017 and $70 a barrel in 2018. This should push up headline inflation in the Philippines, to above 3 percent in 2018. While this is within the BSP’s target band of 2 to 4 percent, in the context of rising global rates [and a worse external balance] this should encourage rate hikes from BSP,” it said.
UBS expects Bangko Sentral to raise rates by 50 basis points in 2017 and by 50 basis points in 2018, following the Fed.
“These dynamics are likely to induce currency weakness. We expect growth to slow in the Philippines – while the external balance has deteriorated, removing a buffer to global capital flows as the Fed is due to raise rates. Rising inflation and higher oil prices will also hurt the Philippines, as it is a net oil importer,” it said.
w by 7.1 percent in the third quarter, bringing the year-to-date average to 7 percent, at the upper bound of the Duterte administration’s target range of 6 percent to 7 percent this year.